The World Gold Council (WGC) reports that the gold market ended on a “strong footing” in 2014 with annual demand down by 4% year-on-year – hardly surprising given record consumer demand in 2013.
Central Bank purchases remained strong at 477.2 tonnes – a 50 year high. Total gold supply remained flat, however, with mine production reaching a record 3,114.4 tonnes while price-sensitive recycling activity fell to a seven year low.
Gold market volatility was relatively low in 2014 unlike its equity proxies (i.e. gold mining stocks), many of which reached levels that were seen when gold prices were trading more than 50% lower. Investor rotation into the broader market probably accounted for some of the decline in gold equities as did the sentiment change for commodities precipitated by the downturn in the base metals complex including iron ore and copper.
Two years ago people (myself included) would never have believed that demand for these metals from China and other Asian countries would drop so precipitously. But it did. The same can be said for gold which has different price drivers and admittedly does not have a strong industrial demand component like copper and iron ore.
Looking to the future the WGC observed that: “The striking West to East shift in gold demand of the past two years is now being reflected in a similar period of change in global gold market infrastructure. Innovators in Turkey, India, China and South East Asia are developing gold products, services and platforms across the entire supply chain to boost market development. Consumer choice is expanding and the supply chain is becoming more efficient and more transparent.”
While the impact will hardly be immediate, new products and infrastructure within the Asian region are certain to promote development of its gold markets. Some important initiatives supporting future consumer demand for gold include the following:
• the launch of the International board of the Shanghai Gold Exchange;
• the new Hong Kong gold futures contract announced by the CME;
• the introduction of the Kilobar Gold Contract on the Singapore Exchange; and
• the Stock of Exchange of Thailand
Central Bank consumption appears to reflect a desire to diversify away from the US dollar, most notable among them being Russia’s central bank which added 173 tonnes in 2014 to its already sizable stocks. “Russian holdings are now estimated at over 1,200t, which accounts for 12% of its overall reserves,” the WGC notes.
On a positive note, ETF redemptions in 2014 were but a fraction of the 2013 total, creating less of a drag on investment. So far in 2015, ETFs have seen inflows of around 60 tonnes, more than 90% of which has gone into US-based funds.
Annual mine production grew for the sixth straight year, climbing 2% to a record of 3,114.4 tonnes, which is hardly surprising given the long lead time from feasibility to commercial production for new mines these days. (In the 1980s newly discovered gold mines in Canada could see commercial production achieved in two years or less. Now you are talking 10 years – or longer).
To their credit, many gold mining companies are abandoning high cost producers while others are seeking to reduce their exposure to high risk political environments in Latin America, Africa and Asia. You can bet a lot of mining executives (not to mention their shareholders) had wished they’d paid more attention to the old mantra that “The grass is always greener on the other side of the hill.”
For the foreseeable future at least, low grade gold projects – which entail large CAPEX risk to develop them on a sufficient scale to achieve economies of scale – are likely to be few and far between.
“The sharp falls in the gold price in 2011 and 2013 prompted a severe cut back in the development of new mining projects, with producers focusing instead on cost cutting and rationalization,” according to the WGC.